Democratic AGs defend proposed consumer loan agency

RonaldD. Orol

WASHINGTON (MarketWatch) -- Four Democratic Attorneys General on Tuesday spoke vociferously in favor of the creation of an independent consumer protection agency for mortgage and credit card products, arguing that federal bank regulators have been an abysmal failure at protecting consumers.

"Consumer protection is a failure at the federal level. When it's a failure, loans become bad and you have the crisis," said Democratic Attorney General Tom Miller of Iowa "History and experience teaches us a lesson here: Consumer protection at the federal level has been a stepchild."

As discussions swirl in the Senate over proposals to weaken a proposed Consumer Financial Protection Agency, Miller joined three other attorneys general, Lisa Madigan of Illinois, Richard Blumenthal of Connecticut and Richard Cordray of Ohio, to discuss their support for legislation approved by the House in December to create such an agency. Read about House bank reform legislation.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., said last week he has reached an impasse on his efforts to craft bipartisan bank reform legislation with Sen. Richard Shelby, R-Ala., who opposes the creation of an independent consumer protection agency. The possibility of creating such an agency has been a key sticking point for the committee. A Dodd spokeswoman did not return calls.

The CFPA approved by the House would write rules, complete on-site exams and conduct enforcement actions for mortgage and credit card products. However, based on the House bill, community and regional banks with less than $10 billion in assets and auto lenders would be exempted from on-site exams by the agency, which would, instead, be conducted by their primary bank regulator.

Republicans and business groups including the U.S. Chamber of Commerce have lobbied intensively against the creation of such an agency, arguing it would reduce necessary innovation in mortgages and raise costs for consumers.

They also argue it would make it more difficult for each bank's primary bank regulator such as the Fed, to oversee the health of banks. Federal bank regulators are responsible for overseeing the 'safety and soundness" of banks, particularly the large national ones.

However, Iowa Attorney General Miller argued that federal bank regulators are more likely to hire someone from the banking industry, rather than a person with a background in consumer protection, because they are more concerned about the safety and soundness of banks than protecting consumers from faulty mortgage products.

"When bank regulators hire someone do they hire someone from the banking industry or someone with a consumer protection background?" asked Miller. "We'll you hire someone in banking because you are concerned about safety and soundness."

House Financial Services Committee Chairman Barney Frank, D-Mass., asserted his own support for such an agency Tuesday.

"Those who cite safety and soundness as a major reason to oppose increased consumer protection have it exactly backwards. In fact, the inability to protect consumers from abuse was a major cause of the financial crisis from which we are just emerging," Frank said.

GOP lawmakers are also opposed to a key aspect of the House bill that would make it easier for a state regulator -- and state attorneys general -- to preempt federal bank regulator consumer protection laws with their own laws. Conservatives complain that big banks could be required to comply with 51 different sets of regulations, including state and federal rules, which would hamper doing business nationally.

But the Democratic attorneys general argued that Federal bank regulators have failed at writing effective rules or enforcing them over the past decade and states should be given more authority because they can act as an early warning system to prevent a local problem from becoming a national one.

"It would be a rich partnership of states and feds to protect market," Miller said.

Jaret Seiberg, analyst at Concept Capital in Washington, said he believes that Dodd will seek a modified version of a CFPA that would write rules, leaving on-site exams and enforcement authority with the federal bank regulators.

Such an approach would be similar to a measure that was narrowly defeated in the House introduced by Rep. Walt Minnick, D-Idaho, that would have created a Consumer Financial Protection Council -- not agency -- that would have kept existing bank regulators in place but coordinated between them to write consumer protection and safety and soundness rules.

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